Sterling dipped on Wednesday after a softer-than-expected reading on British consumer price inflation supported expectations of further interest rate cuts from the Bank of England (BoE) this year.

The pound fell 0.3% to $1.2827, heading for its first session of decline in five against the dollar. It also softened against the euro, with euro/sterling trading up 0.3% at 85.69 pence. Both had been roughly flat before the data.

Consumer price inflation rose to 2.2% in July after two months at the BoE’s 2% target, official figures showed, but fell short of economists’ forecast for an annual rise to 2.3%.

Services price inflation fell to 5.2% in July from June’s 5.7%, lower than the Reuters poll forecast of 5.5% and the lowest since June 2022.

“The Bank of England will take a huge sigh of relief this morning, having seen services inflation finally coming lower,” Kyle Chapman, FX markets analyst at Ballinger Group, said.

Money markets show traders are currently pricing in rate cuts of about 46 basis points from the BoE this year, little changed from Tuesday’s level. The odds of a September rate cut stand at about 48%.

Sterling pauses as traders await key UK economic data

“Given that we got mixed signals from the jobs report yesterday and there is one more inflation report to go before the September meeting, the next decision is wide open. That said, I expect the Bank to pause at the next meeting and wait for more data before proceeding in November and likely December,” Chapman said.

The BoE cut rates from a 16-year high earlier this month after a tight vote by its policymakers who were split over whether inflation pressures had eased sufficiently.

The pound touched a two-week high on Tuesday after figures showed the

UK jobless rate dropped to 4.2% in June - defying expectations for a small rise.